The Little Property That Could – Part III - Time to Expand

  This post may contain affiliate links.  Learn more by reading my disclosure.

 

This post may contain affiliate links.  Learn more by reading my disclosure.

This is Part 3 of a 3 Part Series. 

Because this is an active deal, with both an existing tenant and partners, I can’t reveal certain deal terms.  However, I will do my best to share what I've learned.

If you missed either of the first two parts, please click below for the appropriate article...

Part I - The Little Property That Could
Part II - The Little Property That Could - A Partner Needs Out


Bruchi’s Cheesesteaks is a local favorite. Serving subs and cheesesteaks since 1990, they’ve grown to seventeen locations and recently opened a store in Sacramento, CA.  Bruce and Susan Greene have done a great job with the company, especially with new competition from national sandwich franchises coming into the market.  

In late 2015, I saw a listing for a recently built Bruchi’s Cheesesteaks in Cheney, Washington.  Bruce and a partner owned the building and the Bruchi’s restaurant leased it back from the partnership (much the same way we had structured the Jacobs Java deal).  Bruce and his partner decided to end their business relationship which meant selling the real estate.  However, the Greene’s wanted to keep the business there. This was a “sale / leaseback” scenario - they wanted to sell the building and then lease it back from the new buyer.

Transferring Equity

I had played with an idea for a couple years:  refinance a property, take the equity from it and buy a new building.  I’d read about it being done before, but had never accomplished it personally.

However, I believed I could make it happen with the Northwest Boulevard property.  We could take out the equity we had in it and move it to a new building.  If things worked out the way I dreamed, we would have two buildings for the cost of our initial contribution.

I worked the numbers and it seemed doable.  

I sent my investing partner, Kevin, the marketing flyer for the Cheney property along with my numbers.  “I think we could do this,” he said.

“Me, too.  We just have to get the right price.”

Since Kevin originally represented the Northwest Boulevard transaction, he wrote this deal and submitted it on behalf of our partnership.

After some back and forth on price, we got the building under contract.  The next step was due diligence and to develop a lease with Bruchi’s. 

Our inspection went quickly as it was a new building and in fine shape.

As discussed in the article on sale-leaseback, purchase price was the driving factor in this negotiation.  Therefore, lease rate was easily determined.

The Bruchi’s owners were great to work with and it only took a couple weeks to finalize a lease.  It was a very smooth process. 

Determining the Property Values

Our lender, having had a track record with us, gave this transaction an early stamp of approval.  All we needed was to determine the value of both buildings.

The Northwest Boulevard property needed a Broker’s Opinion of Value (BOV) since we were borrowing less than $250,000.  We believed the building would be worth more, but didn’t want to take out as much as possible.  We only wanted what was needed.

The Cheney property needed an appraisal.

It took several weeks, but they both came in where we expected.

It would work like this:  (numbers are rounded for discussion purposes)

To purchase the Cheney property at 75% loan-to-value (LTV):

  $450,000 purchase price (this is public record)

- $90,000 down payment

= $360,000 new loan

The property we originally purchased in 2010 for $200,000.

The property we originally purchased in 2010 for $200,000.

We refinanced the Northwest Boulevard property at 75%.

Our lender easily approved the refinance.  We paid off the existing loan and pulled out additional cash (equity) and added our sizable reserves to the pot.  We had enough money for the purchase of the new property. 

On 12/29/2015, we completed both the purchase and refinance in a single afternoon.  All paperwork was handled in one sitting at our attorney’s office.

It may be the coolest deal we had pulled off to date.

LESSONS LEARNED

Read

The idea for this transaction had come from one of several real estate books I’d read in the past.  Had I not read about a similar transaction I’m not sure it would have been in my sights to attempt something like this.

We liked the Cheney property and might still have gone after it, but it was certainly more attractive to get it with nothing additional out of pocket.

Ignore the Haters

Looking back to the beginning, this all started with the small property on Northwest Boulevard that I invested 10% in.  There were guys who mocked my involvement with the deal due to the size of my stake, but I don’t remember those guys having real estate of their own.  Now, this small investment has more than doubled in size.  The little property was initially worth $200,000, but the combined LLC value has now grown to almost $700,000.  Yes, there is debt on both properties, but we’re paying it off every month and again building a reserve. 

What do you think?
Have you transferred equity from one property to purchase another?
I'd love to hear your thoughts.